Panmure’s David McCreadie’s comments on stock markets – What a ride!

 
The reverse crash action in the latter part of last week was something of a surprise. That kind of action is not however, new. There have been at least a six times over the past two months where sound technical analysis patterns, indicators, cycle turn dates and wave labelling’s have also offered prime possibilities for a top for the corrective rally from the Aug 2015 lows. None of those matured, and now there is another possibility this weekend. Perhaps this time. 

The S&P is now positive for the year. This could trigger some panic institutional buying, which we have not yet seen, so institutions are not trailing the trackers in an up year. However, in other years when the market was negative in Sept and then turned positive in Oct returns were not very good going forward and often the index struggled to maintain gains throughout Nov. In fact, there have been six other occasions since 1928 when the index has done this, the latest being in 2011. When the S&P turned positive in 2011 it hit a wall of selling causing a 7% loss in the following month and the day it turned positive marked the high for the year. Institutions will be well aware of this and are likely to adopt a cautious approach rather than throwing themselves into a catch up buying frenzy.

 
There has been clear and obvious active manipulation of markets going on over the past several days. When we see significant out of balance readings between demand and supply indicators, it tells us that something has distorted price equilibrium in the market, that intervention has occurred which has made shorts run for the hills. In a normal healthy rally, or an orderly decline, demand and supply pressure should move in tandem, equally, but in opposite directions. This has not been the case the past few days. Furthermore, only a few very large cap companies are leading the charge, which is a favourite strategy to move market indices higher through intervention. Intervention that gives an artificially inflated price to the indices happened in the US blue chips on Thursday, and in the NASDAQ 100 on Friday. For example, just two names, Microsoft and Apple accounted for 56 pts of the 157 point rally in the Dow on Friday. Moreover, the secondary indices did not move to the same extent creating unhealthy divergences. This happens from time to time, and is eventually built into technical analysis price patterns and wave labelling’s and indicators and cycle studies, and in hindsight is clearly understood and useful in future projections of trends. However, at the time of intervention it can be unsettling to a particular forecast or expectation.
 
This week’s FOMC is important. The latest policy decision for short-term and long-term interest rates will be announced. Perhaps it was felt to be important for this meeting that the stock market be in a good place which lets face it, isn’t new.  Complicating the Fed’s task are several items.  First, China dropped interest rates again on Friday and Draghi announced that he is thinking about more QE. These actions have put a bid under the dollar which is likely to rise more. If the Fed believes that equities have reached current levels by reasonable valuations and that their eco data is accurate, (it’s not), then of course they should raise rates. However, if Yellen raises interest rates, the dollar will rise further, exports will drop, and the U.S. economy will slow. Either the market is strong, the economy is strong, and the Fed is about to raise interest rates, or all that is a mirage and Yellen will announce no change to policy. 

The dollar in fact enjoyed a net 2.8% gain last week. The structure looks like a bull flag and is inviting a break above 100. The implications of the dollar trading >100 should be clear to anyone with an interest in the commodity complex.

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